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Edited Transcript of STAG earnings conference call or presentation 31-Jul-19 2:00pm GMT

Q2 2019 STAG Industrial Inc Earnings Call

BOSTON Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of STAG Industrial Inc earnings conference call or presentation Wednesday, July 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin S. Butcher

STAG Industrial, Inc. - Chairman, CEO & President

* David G. King

STAG Industrial, Inc. - Executive VP & Director of Real Estate Operations

* Matts Pinard

STAG Industrial, Inc. - VP

* Stephen C. Mecke

STAG Industrial, Inc. - Executive VP & COO

* William R. Crooker

STAG Industrial, Inc. - CFO, Executive VP & Treasurer

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Conference Call Participants

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* Alexander Mark Pernokas

BofA Merrill Lynch, Research Division - Analyst

* Brendan Patrick Finn

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Christopher Ronald Lucas

Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst

* David Bryan Rodgers

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Mei Wen Tan

JP Morgan Chase & Co, Research Division - Analyst

* Michael Albert Carroll

RBC Capital Markets, LLC, Research Division - Analyst

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Sheila Kathleen McGrath

Evercore ISI Institutional Equities, Research Division - Senior MD

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to STAG Industrial Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Matts Pinard, Senior Vice President of Investor Relations. Please go ahead.

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Matts Pinard, STAG Industrial, Inc. - VP [2]

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Thank you. Welcome to STAG Industrial's conference call covering the second quarter 2019 results. In addition to the press release distributed yesterday, we've posted an unaudited quarterly supplemental informational presentation on the company's website at stagindustrial.com under the Investor Relations section.

On today's call, the company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause the actual results to differ from those discussed today. Examples of forward-looking statements include statements relating to earnings trends, G&A amounts, acquisition and disposition volumes, retention rate, debt capacity, dividend rate, industry and economic trends and other matters.

We encourage all of our listeners to review the more detailed discussion related to these forward-looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental informational package available on the company's website. As a reminder, forward-looking statements represent management's estimates as of today. STAG Industrial assumes no obligation to update any forward-looking statements.

On today's call, you will hear from Ben Butcher, our Chief Executive Officer; and Bill Crooker, our Chief Financial Officer.

I will now turn the call over to Ben.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [3]

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Thank you, Matt. Good morning, everybody, and welcome to the second quarter earnings call for STAG Industrial. We're pleased to have you join us and look forward to telling you about our second quarter results. Presenting today, in addition to myself, will be Bill Crooker, our Chief Financial Officer, who'll discuss the bulk of the financial and operational data. Also with me today are Steve Mecke, our Chief Operating Officer; and Dave King, our Director of Real Estate Operations. They will be available to answer questions specific to their areas of focus.

The industrial sector remains healthy, with tenant demand outpacing new supply in virtually every market in which we operate. Given these conditions, rental rates have continued to grow across these markets. Our second quarter and year-to-date operating metrics bear this out.

STAG's portfolio continues to perform very well. The geographic diversity of STAG's portfolio reflects our vast opportunity set and will provide superior insulation from any market-specific dislocations, if and when they should occur.

Year-to-date, our portfolio has produced double-digit cash re-leasing spreads, retention of 80% and cash same-store NOI growth at the upper end of our public guidance. We continue to see an abundance of investment opportunity across the markets we prospect in. This was demonstrated in Q2, the second largest acquisition quarter in our company's history. We have built and continue to refine a platform that has demonstrated an ability to identify, evaluate and close accretive, granular, industrial transactions in volume. Our investments over the past several years to enhance our internal processes to train our dedicated employees and to promote the use of data analytics across the organization are all bearing fruit. This will be reflected in Bill's remarks with regards to our annual acquisition guidance.

Included in our second quarter acquisition volume is an 857,000 square foot Amazon fulfillment distribution facility located in West Jefferson, Ohio. This recently completed building is an integral part of Amazon's growing package, distribution and delivery service effort for the region. As of quarter end, Amazon is now our second largest tenant, representing 1.7% of ABR.

In our last quarter, we announced our first speculative development project, a 250,000 square foot warehouse distribution facility at Exit 6A of the New Jersey in turnpike Burlington, New Jersey. You may recall that this project is on a piece of excess land associated with an acquisition made years ago. We're happy to announce the project is on schedule for completion by year-end. We will continue to update you on the progress of our development and at this point expect to meet or exceed our initial pro forma.

With that, I will turn it over to Bill, who will discuss our operational results.

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William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [4]

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Thank you, Ben, and good morning, everyone. Core FFO was $0.45 for the quarter, equal to the second quarter of 2018. Leverage remains low, with net debt to run rate adjusted EBITDA of 4.6x. Acquisition volume for the second quarter totaled $260 million, with a stabilized cap rate of 6.1%. We did not acquire any value-add assets or sell any buildings this quarter.

The portfolio operating metrics continue to demonstrate the health of our portfolio. Retention for the quarter was 79.5%, with new and renewal cash leasing spreads of 22.8% and 5.8%, respectively.

Straight-line re-leasing spreads for the quarter were also strong, with new and renewal straight line re-leasing spreads of 34.2% and 15.4%, respectively. Included in our leasing activity this quarter and as an example of the strength in tenant demand we are seeing across our markets, we backfilled the building in Savannah, Georgia with 0 downtime while achieving re-leasing spreads well in excess of 20%.

Same-store cash NOI grew by 1% for the quarter, which was positively impacted by our retention and cash re-leasing spreads and partially offset by a decline in occupancy with the same-store pool in second quarter. Year-to-date, same-store cash NOI has grown 2.2%, driven by a retention rate of 80.2% and cash re-leasing spreads of 11.7% through the first half of the year.

Moving to the capital market activity. We executed the previously discussed equity offering, which resulted in net proceeds of approximately $215 million. During June, we raised an additional $22 million of net proceeds through our ATM program. At quarter-end, net debt to run rate adjusted EBITDA was 4.6x, and our fixed charge coverage ratio equaled 5.3x.

Subsequent to quarter-end, on July 12, we closed on a $200 million 5.5 year delayed draw term loan. The term loan is fully swapped with an all-in fixed rate of 3.11%. On July 25, we funded our $175 million Term Loan E, which was originated last year, with the proceeds used to retire revolver balances.

This term loan is fully swapped with an all-in fixed rate of 3.92%. Included in these debt transactions, our available liquidity is $745 million. Given our performance to date, we now expect stabilized acquisition volume to be between $700 million and $800 million. Including our expected value-add acquisition activity, the guidance for the aggregate acquisition volume is increased to a range of $750 million to $900 million. The stabilized cash cap rate guidance has also been updated to a range of 6.25% to 6.75%. Additionally, we have updated our granular disposition guidance to a range of $75 million to $150 million.

All of our 2019 guidance can be found in our supplemental posted to our website in the Investor Relations section. I will now turn it back over to Ben.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [5]

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Thanks, Bill. The company is operating at high levels across all functional areas of the organization. We have an extraordinarily talented team that's engaged and dedicated to what we're trying to accomplish, maximizing long-term per share cash flow returns to our shareholders. This is an exciting time for STAG as we continue to pursue the opportunity in front of us. We thank you for your continued support of our company.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is from Sheila McGrath of Evercore.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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Many of your acquisitions during the quarter had longer lease term, which typically isn't your sweet spot on pricing. Just wondering if that's driving cap rates a little lower. And are you bumping into more competition from the long-term net lease buyers on those purchases?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [3]

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Sheila, certainly, the longer lease term, which produces -- projects to have longer uninterrupted cash flows will produce lower cap rates, and that certainly is evidenced in some -- the mix of acquisitions for the month -- excuse me, for the quarter. It's not a -- by design, we're not seeking longer lease terms. We're maintaining our long-term cash flow thresholds on a per share and IRR basis. Just is this quarter, we're successful in acquiring some longer lease term deals. Certainly, as we do that, we will run up against people that are looking at those kinds of transactions. But again, we've been able to identify transactions that produce those kind of long-term returns in those longer lease terms.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

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And on the acquisition in Columbus, the larger acquisition, can you talk about competition on that particular asset acquisition?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [5]

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We saw probably -- let me turn it over to Steve.

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Stephen C. Mecke, STAG Industrial, Inc. - Executive VP & COO [6]

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Sheila. That was lightly marketed. We were actually approached by the broker directly. They went to a few groups to acquire it. So the competition wasn't as broad-based as you would expect. But we -- as Ben was mentioning, we do run up against some long-term players than the typical, in our regular acquisitions, the typical fund managers, et cetera. So -- but I have to declare, it was limited pool.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [7]

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Okay. And one last one for me. On the development in New Jersey, your prepared remarks, you seem confident that you'll meet or exceed your pro forma. Can you discuss in more detail how tenant discussions are going on that project? And what is your target yield on cost for that project?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [8]

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The -- we're just about to -- I should've let Dave take this, but we're just about to pour slabs so the building is becoming a reality for potential tenants. So we have a list of tenants that are quite interested in the building. But the reality quotient, if you will, is going up because slab is about to be poured. So we're just getting into the point where it becomes a reality for people visiting the site. I think we talked about it in a -- in our prior call that we expected returns to be at or around 8% development returns.

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Operator [9]

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The next question is from Brendan Finn of Wells Fargo.

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Brendan Patrick Finn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [10]

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So you talked about this a little bit in your prepared remarks, but rent spreads have been pretty strong so far this year, I think 11.7% on a cash basis. So previously, you guys had talked about, on a full year basis, you'd be -- end up in the mid-single-digit range. Is there an update to that? Or is there -- is it likely that you'll exceed that range?

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William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [11]

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Yes. I think our guidance for that is still -- it's mid- to high-single digits, Brendan. We're still comfortable with that guidance for the year.

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Brendan Patrick Finn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [12]

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Sounds good. And then, I guess, like, what has been the driver of the stronger retention this year versus your initial expectations? Is that a few leases that have renewed where you initially thought they weren't? Or is it just stronger retention across the board?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [13]

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That's right. At the beginning of the year, we have assumptions on our assets that are rolling, and there are some that were on the fence that we projected to not retain, and some that we did retain. I did mention that 1 asset this quarter that we re-leased with 0 downtime. If we had retained that tenant, that would have resulted in a 100% retention this quarter.

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Operator [14]

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The next question is from Dave Rodgers of Baird.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [15]

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Hey Ben, going back to the acquisitions, and I guess specifically thinking about the second half of the year and when you closed in the second quarter, I mean, given the longer average lease term, it sounds like you're buying much newer building. Are you just seeing a much greater amount of merchant building out there and kind of quick flips and sell? What are you seeing on the construction side? And do you expect that to continue in your acquisition pipeline going forward?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [16]

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I think there's no question that merchant builders are taking advantage of the market and putting their assets out for sale relatively quickly. I think that, that will continue as long as pricing is as strong as it is today. We're still seeing lots of opportunity in existing buildings in the 5, 10, 15 years old, not brand new buildings. Seeing plenty of opportunity there. And as we -- as I talked about in our prepared remarks, we are more capable in seeing more transaction. Our pipeline is as big as a probable deals or deals that we would acquire. The pipeline is as big as it's ever been, and we're being -- have a bigger presence and a more in-depth inquiry of the markets that we are prospecting in. So we continue to see lots of opportunity, including these build-to-suits.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [17]

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These build-to-suits that you're acquiring, and like you did in the second quarter, what's the average rent bump in those leases or the annual escalators relative to kind of the 5- or 10-year-old buildings that you're buying...

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [18]

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So they run 2% to 3%. 2% at the low end, probably 3% at the high end. You might occasionally see above 3%, but in that 2% to 3% range.

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William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [19]

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Generally, Dave, the longer the lease, the lower the bumps. The longer-term one, the 15-year plus is generally around 2%. But what that results in is you get a higher straight-line cap rate. So our straight-line cap rates this quarter was 6.8% as in -- that's a 70 basis point difference between the cash cap rate. Generally, that has averaged around 50 basis points. So you see a little wider spread there with the longer-term leases.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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Great. Maybe another one. Tenant roll over, looking over the next 12 to 18 months, anything we should be paying attention to there?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [21]

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Nothing in particular. I mean it's all factored into our guidance there, Dave.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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And then lastly, on the dispos, you took disposition guidance down but acquisition guidance up, I realize equity is a component of that, but what kind of made you not want to sell as many assets into kind of the strong markets that we have today?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [23]

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So our mantra has been from the get-go is that we'll sell assets when people will pay more than we think they're worth to us in our portfolio, and so we continue to do that. But we have -- and we have -- at the beginning of the year, we had an expectation a certain amount would occur that we've tempered that expectation through the year. We're still -- we'll sell assets if -- again, if people think they're -- willing to pay more than we think they're worth. And so we've been consistent in doing that. Just a certain amount of that occurs every year. It's not always clear at the beginning of the year what that number will be.

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Operator [24]

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The next question is from Michael Carroll of RBC Capital Markets.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [25]

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Ben, can you talk a little bit about the competitive environment? I guess I understand that the reason why the cap rates are lower is due to the remaining lease term in maybe the newer properties. But how has competition been? Has that pushed private market valuations higher? Is it just that you're being going after a different subset of properties?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [26]

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Well, I think one of the things that we continue to take advantage of is that there's not consistent competition across all the places we look. So as we evaluate the competition at some of the -- competing for some of the assets we acquire, there's basically -- there are almost no names that come up more than once in those kind of assays of competition. So we're not seeing, I think, any particularly new competition or increased competition for assets. It's just there's competition out there with debt rates where they are and obviously industrial being a very favorite asset class, there continues to be competition everywhere.

But we're out there in 60-plus markets, looking broadly across those markets and still only, with our pricing discipline, still inquiring, say, about 15% of the ones that we underwrite. So it is a -- it's more the fact that there's competition out there, but we're -- have a very broad level of inquiry, and we're able to find assets in increasing levels in terms of volume of acquisition.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [27]

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Okay. And then looking at your, I guess, your pipeline of assets you're looking at right now, I guess what's the breakout between the remaining lease term on some of those assets? Is it longer like we've seen in the second quarter? Is it more normal like we have seen over the past few years?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [28]

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Steve is going to give you an assessment of the pipeline as he looks at it right now. I -- my suspicion is that the average remaining lease term is probably not that much different than it's been over the last couple of years.

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Stephen C. Mecke, STAG Industrial, Inc. - Executive VP & COO [29]

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Yes, that's exactly true. It's basically running very similar to what we had in the last couple of years. It all depends on the mix. I mean this quarter was just a different mix than previous quarters. So the 11-plus years is probably less indicative over the normalized lease term.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [30]

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Skewed up by a couple of longer lean-up -- particularly longer lease terms. I think that we've been able to extend the lease term of the portfolio a little bit over the last couple of quarters and last year, but we're looking to buy opportunity where we find it. And if the opportunity is in shorter lease terms to provide better cash flow over time to our shareholders, that's where we'll go. We're agnostic at the lease term as we are to most things. We're just looking for the best long-term returns for our shareholders.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [31]

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Okay. Then going forward, looking at acquisition cap rates, I guess is it fair to assume that those deals are going to be completed in the high 6% range, kind of in line with the initial guidance range that was provided?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [32]

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We reduced our guidance range for the year. This quarter, 6.25% to 6.75%. So it feel pretty -- really comfortable that we'll be within that range.

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Michael Albert Carroll, RBC Capital Markets, LLC, Research Division - Analyst [33]

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But that was due to the 2Q activity. I guess if you're looking at the second half activity, it's going to be back to what was previously expected, and the reduction in this quarter was mainly due to the low cap rates completed this quarter?

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William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [34]

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So Mike, for the year, we're still in that -- for the year, our cash cap rates are still -- stabilized cap rates are still in the range of 6.25% to 6.7% [6.75%]. This second quarter was below, but for the year we're still in that range. So we're not expecting a material change from sort of where we've been running on cap rates.

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Operator [35]

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The next question is from Mitch Germain of JMP Securities.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [36]

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Just one more cap rate question. I mean how do we consider the cap rate on Columbus versus what a more traditional cap rate from what I'd characterize to be a standard acquisition you guys make? How should I think about the differential there?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [37]

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Well, I think as we've said a few times, the cap rate is just a point in time measure. That asset has a nearly 15-year lease with brand new buildings of very low CapEx. As rent bumps, and as Bill mentioned, the cash -- excuse me, the GAAP cap rates are much -- straight-line cap rates are much higher, 70 basis points higher across all of our acquisitions so -- for the quarter. So it's really going to have a lower cap rate because it has a very strong credit and a long-term lease with bumps and no CapEx. So you can develop, or you will develop the kind of accretive cash flow -- long-term cash flow we're looking for out of a lower cap rate. So yes, it'll be a lower cap rate and demonstrably lower cap rate because of all those factors.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [38]

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Got you. And then you might have talked about this last quarter, and I apologize if you went into it in detail. How many other development-type opportunities that you're doing in New Jersey, how much of that exist in a portfolio today?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [39]

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Well, I mean there is excess land on a lot of the assets we own in varying degrees because the best way to -- or the most common way to lose a tenant is the building is not big enough. So the ability to expand the building is something that we look for. And certainly, on build-to-suit transactions, people build in generally expansion capability on the site. Having said that, most of the available land or excess land isn't covered by the existing lease and/or either directly in the lease or an understanding with the tenant or belief on our part that we want to maintain that flexibility to keep the tenant. But there are certain instances, and we're evaluating where there is excess land that would allow development immediately.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [40]

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Are you pursuing entitlements? Is that the way to consider evaluating? Or...

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [41]

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That might be a little strong.

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William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [42]

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We investigate the market for viability. And then if we determine it's a path we want to go down, we will work on marketing and entitlement. Those are handful of instances.

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Operator [43]

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The next question is from Bill Crow of Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [44]

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Ben, would you be okay -- I'd be guess if your pipeline really started to skew toward that sub 6% cap rate as well as it's either in newer building, longer lease or better bumps? Is that the right takeaway here?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [45]

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Yes. Yes. I think, again, reiterating the cap rate discipline and time measure, we're really focused in our return analysis on longer-term measures. And so big rental bumps, longer leases, clean CapEx, someone's just replaced a roof on a building, even in a marginally older building where the roof is brand new, can project to have lower-end, perhaps, HVAC equipment or pledge parking lots had been redone can project to have lower CapEx. So all those things can mitigate towards lower cap rates, but I don't think that the -- I don't think that necessarily we're going to be trending down towards those lower cap rate.

The other thing to keep in mind is our debt costs are low. Our equity costs or cost of equity, if you will, is pretty favorable right now. I think it should be more favorable. I guess every CEO does. But so we're in a place where the cost of capital also is mitigated to making lower cap rates still accretive. Across all the acquisitions we've done this year, we're looking for FFO accretion -- marginal FFO accretion in 15% to 20% relative to where we are today. So we're still finding immediately accretive transactions to undertake.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [46]

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Okay. And my second question is that we have been seeing weakening manufacturing data over the last few months, can you just kind of take us inside the mind of your tenants and whether that's the auto or other manufacturing sectors, what are you hearing?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [47]

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I'm going to turn it over to Dave. I can voice my opinion, but he's a little closer to the tenants.

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David G. King, STAG Industrial, Inc. - Executive VP & Director of Real Estate Operations [48]

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Yes. Our customers still are exhibiting a high degree of confidence. Lease terms have held up on new activity. And they might be a little more cautious, a little more aware, but their actions haven't really changed over time.

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Operator [49]

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The next question is from John Massocca of Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [50]

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To probe on kind of the Amazon cap rate a little bit more, how much did that kind of impact the overall cap rates in the quarter? I mean would you have been more in line with the new kind of midpoint of guidances without that transaction?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [51]

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Obviously, that adds because of the features we've talked about on the cash flows can be derived from that asset. Clearly, it was at a lower cap rate than the average cap rate for the quarter. So yes, it wouldn't raise the average cap rate for the quarter had we not acquired that. We're not going to get into individual cap rate on acquisitions, but clearly, that's a transaction -- we had another transaction that had an 18-year lease in it that obviously also would have mitigated the cap rates lower.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [52]

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Okay. And then on Amazon, again, I mean what got you comfortable with that particular asset, given sometimes Amazon properties can maybe be characterized as being kind of overbuilt or over specified. Just any details on the actual property itself?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [53]

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This is a generic, if you will, a generic Amazon state-of-the-art fulfillment center, 855,000, 857,000. This is what they're building today. Amazon, as -- we have a shell there. Amazon has put a bunch of money in on top of that shell cost. The -- 15 years from now, we can't foresee exactly what Amazon is going to be looking for or what other tenants are going to be looking for, but this is a good, functional, e-commerce fulfillment building, state-of-the-art as of today.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [54]

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Okay. And then can you maybe provide some color on what, if any, portion of 2Q '19 acquisition activity was value add.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [55]

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We did not do any value-add acquisition activity in the quarter.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [56]

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Okay. And then month-to-month leases came down pretty significantly. I know it's fairly variable quarter-over-quarter, but it was pretty significant drop from 1Q to 2Q. Can you maybe provide some color around what drove that?

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David G. King, STAG Industrial, Inc. - Executive VP & Director of Real Estate Operations [57]

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There's no outstanding issue I can point to. That number, as you mentioned, is going to be quite volatile. So it could very well tick up for next quarter. We don't really spend a lot of time trying to predict that number.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [58]

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But month-to-month tenancy tends to either go away or get long term, right? It tends to move away from the middle or from that to the boundaries, either vacancy or longer-term lease.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [59]

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Okay. But just given your retention rate, kind of felt like it went to a longer-term lease. I mean is that kind of a trend you're seeing? Could that run lower going forward?

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William R. Crooker, STAG Industrial, Inc. - CFO, Executive VP & Treasurer [60]

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Yes. I think, as Dave said, there's no real trend to that number. I mean every quarter, it's a different number. So yes, some of those, obviously, went to longer-term leases with the renewals, but it changes every quarter.

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Operator [61]

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The next question is from Sarah Tan of JPMorgan.

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Mei Wen Tan, JP Morgan Chase & Co, Research Division - Analyst [62]

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So I thought you guys (inaudible), but how are you guys thinking about portfolio sales?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [63]

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So we looked at portfolio sales historically for capital raising. So at times, we didn't like our common equity pricing or didn't feel it was a -- behooved us to raise common equity. We've done portfolio sales, again, to raise capital. That is not a driver at this point for us to do portfolio sales. We have positive operating leverage. And so when we buy assets, we get to take advantage of that. When we sell assets, obviously, we do not take advantage of that. We do believe that we could do a portfolio sale on an accretive basis, but we think it is better for us and for our shareholders at this point to issue common equity and grow the size of the portfolio.

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Operator [64]

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(Operator Instructions) Our next question is from Chris Lucas of Capital One Securities.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [65]

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Just a couple of quick ones, I think. On the balance sheet, you guys continue to bring the run rate on the leverage down based on sort of an over-equitization of the acquisitions during the quarter. Is this something that we should continue to see as the stock price continues to perform? Or is this something that should balance out and gravitate more towards the -- within the range that you guys have provided?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [66]

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Yes. For the year, Chris, the range is 4.75% to 6%. But as we previously stated, we're going to operate at the lower end of that range. So we are a little bit below the low end of the range today, but that should moderate as the year progresses.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [67]

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So no -- I guess maybe a way to think about it is, any sense as to whether or not you'd be willing to take that range down as the equity markets continue to support your strategy?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [68]

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Yes. Something we always consider is our leverage range. Right now, we're comfortable with the 4.75% to 6% operating at the low end of that.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [69]

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Okay. And then I guess, Ben, on the leasing side, a lot of success, high retention rate over the last couple of years now. How much of your leasing is done in-house versus through third parties at this point? And where are you as it relates to sort of rolling out a regional program versus maintaining sort of centralized leasing programs?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [70]

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So we use -- we have third-party brokers on all leasing, both renewal and new leasing to take advantage of the -- obviously, the market knowledge, et cetera, and also to maintain good broker relations because we buy a lot of things from those brokers also. We will look at rolling out regional asset managers, but we do not intend to move vertical integration past asset management. So we do not have a desire to be involved in property management.

Our discussions on this in the past have focused on it's a difficult business. It's a difficult business to take money in. We'll take advantage of somebody else having developed property management expertise and use the best-in-class property managers in the individual markets in which we operate. So it's highly likely that we'll maintain our vertical integration limit at the asset management level. It's also highly likely that we'll have asset managers in the field at some point. But to date, they're all still in Boston.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [71]

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Okay. And then the last question for me. I want to say, like a year ago, we saw some large, very large transactions occur in the marketplace, and I think it was a headwind somewhat to second half transactional opportunities for you guys. I know the pipeline's very large right now, but given some other recent large industrial transactions in the marketplace, any sense as to whether or not the sort of your bread-and-butter one-off market will be impacted this year? Like it...

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [72]

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Well -- yes, I think that the one-off market will not be impacted. We're -- we've talked about in the past, the fragmentation of ownership of the industrial market where the top 20 owners own somewhere between -- well, it's changing. There's a little more concentration going on, but probably at this point maybe 15% of all the fungible industrial assets in the U.S. are owned by the top 20 owners. So the other 85% of the assets are owned by small sellers. That's who we are mostly buying from. And their reasons for selling are usually relatively unrelated to or uncorrelated, if you will. So there is pretty much a steady supply.

Our increasing pipeline side I think is more a factor of our presence in the market, more outward-facing acquisition people, better support for those outward-facing acquisition people. And to some extent, the use of data and that will increase its impact in identifying assets that makes sense for us to pursue. The large transactions, the GLP, the IPT transactions, et cetera, actually, will probably end up being a source of transactions for people like us as the -- those portfolios are winnowed down post acquisition. We're not likely to be a competitor for -- it's been rumored that Blackstone may sell as much as $5 billion out of the GLP transaction. We would not be a competitor or indeed likely competitive for a large subset of that $1 billion-plus portfolio or even probably $0.5 billion-plus portfolio, but there will be individual assets that will fall out of all that, and we'll be ready to analyze and pick those up at good, accretive prices for us.

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Operator [73]

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The next question is from Alexander Pernokas of Bank of America Merrill Lynch.

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Alexander Mark Pernokas, BofA Merrill Lynch, Research Division - Analyst [74]

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I was just wondering if you could talk about the tenant demand and rent growth you're seeing in specific markets and maybe which ones stand out the most? And then which markets are you seeing the most opportunity for acquisitions?

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [75]

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So we -- as we start off, we're a ground-up prospect or an investor. So we're really not making decisions based on particular markets. There can be a great transaction in Ontario, California or in Dayton, Ohio and there can be a really bad transaction in Ontario, California or in Dayton, Ohio. So we're very much focused on the individual asset and the opportunity that is presented by that particular acquisition. And indeed, we evaluate every acquisition based on the market background and the submarket background of the building and that specific building with the specific parameters it operates in. So it is really not a top-down, "we like this market or we don't like this market," analysis. We're looking broadly across 60-plus markets to find the right opportunities to provide that good, long-term cash flow and growing cash flow to our shareholders.

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Alexander Mark Pernokas, BofA Merrill Lynch, Research Division - Analyst [76]

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Okay. And then what are your thoughts on your upside for more spec development? And are you taking kind of the wait-and-see approach? Or -- you seem pretty optimistic about how this was going so far. I was just wondering if I could get a little bit more color on that.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [77]

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Yes. So we're -- we view speculative development as a marginal -- not a marginal -- incremental add to our overall business that we -- we're not out acquiring land to do speculative development. We happen to own land as part of other acquisitions, as part of building and cash flow acquisitions that we will purpose to speculative development as appropriate and/or build-to-suit development as appropriate. But it is not a part of our business where we're going out to develop a land bank. But we certainly evaluate transactions that have additional land for the value inherent in that potential for additional development.

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Operator [78]

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There are no additional questions at this time. I would like to turn the call back to Ben Butcher for closing remarks.

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Benjamin S. Butcher, STAG Industrial, Inc. - Chairman, CEO & President [79]

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Well, thank you, everybody, for joining us this morning. As I said in the prepared remarks, things are running extremely well here at STAG. The opportunity set in front of us is extremely large, and we expect to have a really good second half of the year and going forward into 2020 continued success. So we appreciate your time this morning, and hope you have a good rest of the summer.

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Operator [80]

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This concludes today's conference. You may now disconnect your line. Thank you for your participation.